Jason Roberts, founder and CEO of the retirement
services consulting firm Pension
Resource Institute, explains rollover recommendations have long been on
the Department of Labor’s (DOL) radar. For that reason he predicts advisers already serving as
fiduciaries for retirement plan clients will likely not face a fundamental
shift in the sorts of rollover recommendations that constitute prohibited
transactions under the Employee Retirement Income Security Act (ERISA) when new
fiduciary rules finally come through—though the fiduciary net may be widened to
include more types of advice relationships.

The DOL could deliver new rules as soon as
August, but observers say it is likelier the fiduciary redefinition will be
delayed once again and will not be released until after the midterm elections, in late 2014 or early 2015. Other regulators, including the Financial Industry Regulatory
Authority (FINRA) and the Securities and Exchange Commission (SEC) are kicking
around rule changes of their own related to rollovers, cross-selling and fiduciary
status (see “Some
Advisers May Want to Pause on Rollovers”).

The regulators say they are examining whether
emerging technologies and business models cause previously overlooked conflicts of interest. Concern about individual
retirement account (IRA) rollovers in particular is growing, as an estimated $2.1 trillion
is expected to flow from defined contribution (DC) retirement plans into IRAs
in just the next five years (see “An
Inside Perspective on Rollover Rulemaking”).

To
get a sense of where they stand on the matter, Roberts says advisers should
turn to the DOL’s 2005
advisory opinion that sets forth the department’s
position on marketing additional services and products to plan
participants and beneficiaries. The opinion points to three factors that advisers
should be aware of while considering whether they face an inherent conflict of
interest when recommending clients move money away from an employer-sponsored
plan and into an IRA.

The important facts, Roberts says, are whether an
adviser uses the authority that makes him a fiduciary to cause a
participant to take a distribution—and whether the advice to move assets is coupled
with a recommendation to invest the proceeds in a manner that results in
greater compensation being paid to the fiduciary or his affiliates. An adviser
who hits all three triggers—i.e., who 1) utilizes his position as a fiduciary to
2) cause a rollover that 3) results in higher compensation for himself or his colleagues—may be violating ERISA
section 406(b), Roberts says.

That’s true now, and it certainly will still be true if
the fiduciary definition gets strengthened or applied more broadly, Roberts
says.

Advisers are most at risk of triggering a prohibited
transaction when they provide individualized, ongoing investment advice to plan
participants or have discretion over the plan’s designated investment
alternatives, Roberts adds. In that case it is easier to see how an adviser’s recommendation
could be seen to “cause” a rollover “through” his fiduciary standing.

And it’s
also apparent how a conflict of interest could arise when the assets
are rolled into a vehicle that brings higher earnings for the adviser or
his firm through fees or commissions. Advisers have more protection when their
role is limited to providing general education on rollover options and the participants
are clearly directing their own rollover decisions, Roberts says.

Richard
Schwamb, a senior financial adviser and senior vice president for wealth
management at Merrill Lynch, says that fact has caused significant pushback across
the industry since the DOL first proposed a fiduciary redefinition back in 2010, with many advisers arguing that their input is needed most when participants
approach retirement and must decide among the options available when exiting a DC
plan. Left to consider the options on their own, Schwamb says, many
participants get overwhelmed and choose to simply leave their money where it is,
regardless of whether that is the best option. Or, in the absence of direction from a trusted adviser, participants are forced to heed the advice of non-fiduciaries, which may or may not be given in their best interest.

Another complaint often floated by advisers during the rollover discussion, Schwamb says, is
that the DOL doe not seem to appreciate the fact that while an IRA account can
drain more in fees and investment expenses, it isn’t necessarily an inferior option.
He says IRAs often provide access to a wider investment universe than a
DC plan account. Additionally, it can be helpful for retirees in setting
appropriate asset allocations when monies from disparate retirement plan accounts
are brought together into a single IRA, forming a more comprehensive picture of the retiree's finances.

Roberts agrees. The plan-exiting
strategy an adviser recommends should hinge on the following factors, which are
listed in FINRA
Regulatory Notice 13-45, issued in December 2013 as a reminder to broker/dealers
of the requirements they face when recommending rollovers, he says. Advisers
must provide participants with clarity on:

The various investment options in each
distribution option;

The fees and expenses in each option;

The advice and support services under each
option;

Whether an option comes with tax or distribution penalties;

The different levels of protection from creditors
and legal judgments;

The minimum distribution requirements that apply to each
option; and

The tax consequences of significantly appreciated
or highly concentrated positions in employer stock or other assets.

Schwamb and Roberts agree that advisers who provide
regular and ongoing investment advice directly to participants about specific
decisions and circumstances—and who therefore may be at greater risk of
triggering prohibited transactions under 406(b)—can do a lot to protect their own
interests by educating clients and making disclosures on these factors.

Schwamb
and Roberts addressed the fiduciary redefinition and its impact on rollover practices
during the NAPA 401(k) Summit, hosted by the National Association of Plan
Advisers (NAPA) in New Orleans.